Statements to Congress - Transcript

Federal Reserve Bulletin, Sept, 1997

Changing Role of Consolidated Oversight

The modernizing of our financial system -- especially the combining of banks, securities firms, and insurance companies, as well as possibly banking and commerce -- requires that the role of consolidated oversight also be reviewed.

The necessity to understand and review centralized risk management and control mechanisms, and similarly to review intra-organizational fund transfers involving the insured depositories, does not require bank-like supervision of nonbank affiliates. The Competition Act appropriately recognizes this. It would require that the banking agencies rely to the fullest extent possible on examination reports and other information collected by supervisors of other regulated entities. In addition, the bill would require that the banking agencies defer to the Securities and Exchange Commission in interpretations and enforcement of the federal securities laws and to the state insurance commissioners and to state insurance laws. The bill continues to allow the Federal Reserve Board to establish capital adequacy guidelines at the holding company level. However, the bill sets important limits on these holding company guidelines. For example, the consolidated supervisor may not impose capital requirements on any nonbank subsidiary that is in compliance with applicable capital requirements of another federal or state agency. In addition, holding company capital guidelines must take full account of the capital position of these regulated nonbank subsidiaries when establishing consolidated capital guidelines and full account of capital levels in unregulated subsidiaries when those levels are consistent with industry norms. The bill requires the Federal Reserve Board to address the use of double leverage (that is, the use of debt at the holding company to fund equity and subordinated debt at a regulated institution) but prohibits the establishment of a capital ratio that is not risk weighted. In addition, the bill requires that the consolidated supervisor consult with other supervisors, including, in particular, supervisors of nonbanking entities, before establishing capital guidelines for holding companies.

All of these -- the capital and examination rules -- are extremely important provisions both for existing bank holding companies and for securities firms and insurance companies that wish to affiliate with banks. Such provisions would greatly enhance the "two-way street" by eliminating unnecessary burden and red tape.

The Board believes that bank holding companies need to continue to have consolidated oversight both to protect the safety net and to limit the transference of the safety net subsidy. We believe that the Federal Reserve must not have its ability impaired to monitor banking organizations in order to respond effectively to systemic crises, to manage the risk in the payment system, and to ensure the safety and stability of our financial system.

Conclusion

To summarize:

* The Board supports the overall thrust of the Banking Committee bill that is now being reviewed by this committee. We strongly support the bill's approach to affiliations of banking, securities, and insurance organizations.